How to create a budget
Before creating a budget, it is imperative to take a good, hard look, at your lifestyle.
A reliable budget is the first step of financial organization. In order to create one, you must first have an overview of your yearly expenses. With this information, you will be able to come up with a monthly budget that will allow you to gauge your spending in accordance to short term goals.
Follow these 3 simple instructions for creating both the annual and monthly budget:
- Track expenses. Keep a record of every single penny spent for during one month. The results are usually eye-opening, since most of us are very aware of fixed expenses, like the rent, but miscellaneous expenditures, such as food and entertainment… are harder to pin down. And even trickier is trivial spending, like morning lattes or small treats for the kids. Next to each entry, notate it as a “need” or “want”.
- Classify those expenses in categories such as ENTERTAINMENT, FOOD, and HOUSING. Take into consideration loan payments; add a category for them if these are recurring payments.
- Then, make a calendar with a column for each month, and input all of this categories and figures on each.
- Consider expenditures which only happen occasionally, and note them on the appropriate month column. For example: On December you could add CHRISTMAS GIFTS: $400 (or whatever you usually spend), or in September: BACK TO SCHOOL. Now you have an overview of your annual spending.
- If you wish, you can divvy up the large occasional expenditures; such as Christmas Gifts, into 12 months, and include the amount on your monthly budget. This way, you could set apart $33 dollars each month towards Christmas, instead of being hit with the $400 at the end of the year.
- Figure out your income. Add up the monthly salary (after taxes), of every adult who contributes to the household, plus other sources of income: Christmas bonuses, child support, pension. If your income varies greatly from month to month, try to figure out an average.
- The X-Ray. The only thing left to do now is a simple math operation. Subtract monthly expenses to monthly income. If your numbers are on the red, don´t panic. With your budget in hand, take a hard look at those items you have categorized as “wants” (not needs), and figure out a way to cut back on them. At the same time, look for ways to increase your income.
If your numbers are positive: Congratulate yourself! But don’t run out to buy a new TV just yet. Rather than that, designate a portion of the exceeding figure to create an emergency fund. And then, why not? Splurge on a treat.
By visualizing when and where your money is going, you can plan ahead. Whatever the results, the compiled information will allow you to determine ways to reach your financial goals. You will gain a sense of control over your finances and your life.
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